Negative Equity on a Trade-In: What Texas Car Buyers Should Know

The short answer

If you owe more on your car than it's worth, that gap is called negative equity, and it doesn't disappear when you trade the car in. A dealer or lender may offer to roll it into your next loan, which makes that loan bigger and more expensive. Before you trade, get your exact payoff amount, find out what your car is really worth, and read the amount financed on the new contract so you can see where the old balance went.

What negative equity is

The FTC's guide to auto trade-ins and negative equity explains it plainly: with rare exceptions, cars lose value as they age, and accidents or damage can lower value further. If you borrowed to buy the car, it's possible to owe more on the loan than the car is worth.

The FTC's example:

• Your car is worth $15,000.
• You still owe $18,000.
• That's $3,000 in negative equity, and to trade the car in, that $3,000 has to be paid.

"We'll pay off your trade, no matter what you owe"

You've probably heard that line. The FTC warns that when a dealer promises to pay off your loan no matter how much you owe, the promise may be misleading. Some dealers pass the cost back to you by adding the negative equity to your new loan, taking it out of your down payment, or both. Either way, you end up paying it, plus interest on it in the new loan.

The FTC says that if a dealer told you they'd pay off the loan themselves but really rolled the cost into your new loan, that's illegal, and you can report it at ReportFraud.ftc.gov.

What the CFPB found about rolled-over balances

The Consumer Financial Protection Bureau's June 2024 report, Negative Equity in Auto Lending, looked at loan data from nine lenders for loans made between 2018 and 2022. Among its findings:

• 11.6% of vehicle loans in the dataset included negative equity.
• When negative equity was rolled in, the average amount was $5,073 on new-vehicle loans and $3,284 on used-vehicle loans.
• Average monthly payments were $626 on loans with negative equity, compared with $496 with a positive-equity trade-in and $493 with no trade-in.
• Borrowers who financed negative equity were more than twice as likely to have their account assigned to repossession within two years as borrowers with a positive-equity trade-in.

That data is a few years old and comes from a sample of lenders, not every loan in the country. The direction is still clear: carrying an old balance into a new loan tends to make the new loan heavier.

Four steps before you trade

The CFPB's answer to should I trade in my car if it's not paid off? and the FTC's guide line up on the basics:

1. Get your payoff amount from your lender. The CFPB notes it can differ from the balance on your statement because of how interest is calculated, fees, or other reasons.

2. Check what your car is worth. Both agencies point to pricing guides like Kelley Blue Book, Edmunds, and NADA Guides, and the CFPB suggests getting trade-in estimates from more than one dealership.

3. Ask how the dealer will handle the gap, and make sure any promise is written into the contract.

4. Read the contract numbers. The FTC says to look at the down payment and the amount financed on the installment contract. You may have to do the math to see where the negative equity went. Our post on five numbers to check before signing a Texas car loan walks through those disclosures.

Your options if you're underwater

The FTC lists a few paths:

• Wait until you have positive equity. Extra principal-only payments can get you there faster.
• Sell the car yourself, which may bring more than a trade-in offer. Our comparison of trading in vs. selling outright covers the tradeoffs.
• If you do roll it in, keep the new loan term as short as you can afford. The FTC notes that a longer term means it takes longer to reach positive equity and you pay more interest.

After the deal: confirm the old loan is paid off

The CFPB recommends finding out which department at your old lender confirms payoffs, then waiting about a week and checking that the old loan was actually paid. If it wasn't, contact the new lender first. If it still isn't resolved, the CFPB says you can complain to the FTC or the CFPB or contact your state attorney general.

How I can help

I'm Steven Wilson, Sales and Social Media & Marketing Manager at Kramer Autoplex. I help Houston and East Texas buyers with good, bad, thin, or no credit by shopping each application across a wide lender network. If you owe on your current car, ask me to walk through the payoff and the amount financed with you before you sign anything.

• The first step is just your name plus a phone number or email (about 20 seconds), and there's no credit check yet. The full application, which does involve a credit check, comes later.
• A same-day answer on where you stand is typical, but it's not a guarantee of approval.
• Free delivery anywhere in Texas, so you don't have to come to Houston.

Know your payoff, know your car's value, and read the amount financed. That's how you keep an old loan from quietly following you into the next one.

When you're ready to see what you qualify for, start here: https://stevensellscars.com/start